Canadian Dollar to Outperform US Dollar Over the Coming Years.

The American Dollar is in trouble. Over the past couple of decades the US Government has borrowed and borrowed and now the White House sites on over $11,925,000,000,000 in debt. That’s around $38,834 per person! Take a look at the US Debt Clock. If you scroll down to the bottom you will see that each citizen in the US is Liable for an estimated $348,953 of Total Debt. If you think the US Consumer will be back in their full glory of spending fury any time soon than please explain how this is possible to the rest of the World.
On October 5, 2009 a major rumour that could significantly deflate the value of the US Dollar hit the media. The rumour, some Gulf Arab states were considering using currencies other than the US Dollar for oil trading. The Canadian Dollar responded to these accusations by rallying over $0.01 which is over 1%. If Arab Oil economies do in fact make such a move from the dollar there is huge potential for a nose dive in the US Dollar. This would make US Exports cheap and potentially help revive American production, but at the same time the US is a net importer so a lower dollar will destroy American purchasing power. This would be another stake in the heart of the American consumer.

An American consumer that has to pay more for goods and services will experience extreme amounts of inflation scraping away years of wage increases, and further eroding retirement portfolios. I guess freedom 55 becomes a tall tale.

With the Arab oil rumour in full force during afternoon trading Gold price shot higher. Inflation concerns were the main culprit. This rumour was brushed off by the Arab Oil States, but such a rumour sounds all too reasonable.

If you were an Arab Oil State and concerned about your profits being tied to the US Dollar where would you turn?

Let’s face it, there are only so many currencies that make sense for petro trading: the Euro, the Chinese Yuan, the Russian Ruble, the Japanese Yen, the Canadian Dollar, the Australian dollar.

Some of these currencies can be scratched from the list almost immediately due to their lack of faith from the investing World. Personally, I would immediately remove the Yuan and Ruble from the mix due to my lack of familiarity with the currencies and potential for drastic changes due to government control. The rest I would argue could be a diversified mix of currencies the Arabs may turn to in search of replacing US Dollars.

There is still too much uncertainty in the stock market and currency markets to make a well established prognosis, but it does give you something to think about in the mean time. My personal opinion is that the Canadian Dollar will appreciate over the coming year at the expense of the US Dollar as the American Economy is lucky to limp out of this recession. The other currencies above are also likely to do the same.

Previous Articles about the Canadian Dollar at Investing in Canada include: Is Now the Time to be Investing in Canadian Dollars, Canadian Dollar: How to make money on the increasing value of the Canadian Dollar, GDP Growth, Inflation and the Yield Curve, Strength of the Canadian Dollar

Canadian Big 3 Telecoms Scramble to Defend Against New Rivals

Only offering Neapolitan ice cream in a country as big as Canada is outrageous; so why has it taken so long for more than 3 wireless providers to offer service in Canada? The Big Three Wireless Providers, Bell (TSE:BCE), Telus (TSE:T), and Rogers (TSE:RCI.B) have controlled the CRTC for far too long and are fighting hard not to lose that control.
Last year it was announced that the Canadian Government decided that times have changed and since Canadians have been gauged by Bell, Rogers and Telus for far too long, an auction would be set to effectively allow other companies to offer wireless service in Canada. That auction came and passed and consumers have been waiting well over a year now to see some results. A previous article on this blog, New Cell Phone Competition: What’s in store for Canadian Telecom Giants, announced the new companies that were successful in their bids for wireless contracts and provided the amount they spent on those contracts.

Bell, Rogers, and Telus have not given up their fight to remain masters and have thrown every trick in their CRTC complaint book to the board. The most notable has been the uproar about a private company called Globalive (www.globalive.com). Globalive is thought to be the only real threat to the big 3 as Globalive has the potential to become another national carrier. The Bell, Telus, Rogers oligopoly went so far as to try to force the CRTC to forbid Globalive from operating in Canada for a bunch of insignificant details. To read more about the CRTC’s decisions with reference to this case take a look at ISPs upset with latest CRTC ruling.

The brand name that Globalive is entering the market under is WIND. WIND has a 10 year history of operations in Italy and Greece and has a strong reputation throughout Europe. This should challenge Telus, Rogers and Bell into providing better service in Canada at more affordable rates. WIND is meant to launch in the fall of 2009 so it’s no wonder Bell and Telus recently made a major announcement.

Now Bell, and Telus announced that they will be offering the iPhone starting in November according to an October 5th article in the Globe and Mail titled “Bell, Telus to launch iPhone next month.” This sounds like, looks like and tastes another attempt by 2 of the 3 big wireless providers to lock up some unknowing customers on 3 year deals before some of the new providers can start their major advertising campaigns. If you are not on a contract already then wait it out for a great deal.

If you are an investor in any of the big three wireless providers I warn you one more time, market share is in jeopardy and profits will be cut by price wars.

How to Profit in a Down Stock Market

 There are many ways to profit in a declining stock market, but I want to discuss a method where your downside risk is limited while upside potential profit remains huge.
 The stock market has been in a mid-term up trend for many months now and these stock increases have been fuelled by speculation and greed. There are many reasons why there is potential for a stock market pull back and these have been discussed in previous articles on Investing in Canada: How to Protect Yourself From a Red October, Double Dip Recovery or V Shaped Recovery.

The most effective way to profit from a pull back in the stock market is to implement a very basic options strategy: The Long Put.

Now, this is not your regular old Long Put. I am not suggesting simply buying puts on a stock like (Nasdaq:GOOG) and hoping it tracks the market or drops more than the market; what I am suggesting is a Long Put on steroids. Basically, ETFs have made going long and short the market very affective because many have options capabilities with large volume. Further, leveraged ETFs that are long or short the market allow you to gain an added incentive since there are rebalancing cost for the fund that chip away at the total value.

Some issues that you need to consider before undertaking such a strategy are:

• The duration of time you expect the pull back to occur over

• The size of the pull back

A rule of thumb with options trading is that the longer the duration to option expiry the more you pay; the closer the strike price is to the current price, the more you pay; and the lower the volume in the options traded, the more you will pay.

Now that we have some basic rules I will provide my interpretation of what these rules mean to me today and how I will be executing.

• First, it is a difficult feat to pick the absolute top or bottom of a market cycle so a very short term options contract will not work for me.

• Second, I do not want to pay a tonne of option time premium

• Third, once a pull back begins I do not expect to be able to pick the bottom.

• Forth, when investing in Canada you will notice that options do not get the volume necessary for a tight bid/ask spread so I will look to NYSE, AMEX, or Nasdaq options.

Given this and the fact that I want to be well diversified in my strategy I will buy puts on a market ETF. There are so many different ETFs out there now, but these guidelines narrow it down very quickly.

Although there are not currently any leveraged ETFs that track the S&P 500 my selection is to track this market as it is a good gauge for the overall market in North America.

My selection is to buy puts on (NYSE:SPY), which is an ETF that tracks the S&P 500 and has the seconded highest volume out of all North American ETFs.

The next step is to determine the time duration I am comfortable with. Since the erosion of the option time premium increases exponentially as you get closer to the expiry date and I want a slightly lower priced option I will go for a December 2009 expiry.

Now you go to look for the cost of the various puts for your time frame. The closing price of (NYSE:SPY) was $103 so if I pick a price very near to $103 I will be paying more for being at or near the money and the further down in price I pick the strike price the cheaper the contract will be. You need to balance out your price expectations here against the time frame.

I could conceive of a 15% pull back at this point so something around $87-90 suites me. When scrolling through the DEC put option contracts on SPY I noticed that the $90 strike has large volume and many open contracts. As a result this is the contract I will purchase.

The contract symbol I am referring to is FYSXL.X; the bid is $1.40, and the ask is $1.46. Let’s assume I have to buy on the ask at $1.46 to calculate the break even point per contract that I buy at expiration.

B/E = Strike Price – Premium Paid

B/E = $90 - $1.46 = $88.54

This means that SPY must trade below $88.54 at expiry to make a profit. This is effectively a 14% drop in the S&P500.

Now, that is assuming that I hold onto the contracts until expiry, which I would not recommend. If I sell the contracts at the end of October I will still be able to recuperate a substantial amount of time and risk premium from the contracts.

The great thing about options is that when you buy puts or calls the most money you can lose is the amount you put in and you get to be leveraged 100 to 1 against the stock or ETF index.